Ch. 19: Charging Order Protected Entities (COPEs)

• Introduction

Definition: Charging order protected entities (COPEs) – Entities that restrict the remedies of a creditor of an owner to a “charging order” that entitles the creditor to distributions made in respect of that ownership interest, but do not allow—at least initially—the creditor to actually take the ownership interest. From an asset protection standpoint, the advantage is obvious: The creditor has no immediate means of getting at the assets in the entity even though the creditor holds a judgment against one of the owners.

Extensive information relating to charging orders, including excerpts from the uniform partnership and LLC acts, and a collection of opinions concerning charging order protection, is collected at http://www.assetprotectionbook.com/charging_orders_intro.htm

• Partnerships

Synopsis: Discusses the basics of general partnerships and limited partnerships, and their U.S. tax treatment.

Definition: Partnership – A partnership is an association of two or more persons carrying on a business venture as co-owners for profit. Partnerships come in two basic varieties: general and limited.

Definition: General Partnership (GP) – A partnership that consist only of general partners, all of who are jointly liable for the liabilities of the partnership, and all of whom have management rights to the partnership. In asset protection planning, general partnerships are usually to be avoided.

Definition: Limited Partnership (LP) – A partnership that consist of general partners who are jointly liable for the liabilities of the partnership and who have management rights to the partnership, and limited partners whose liability is limited to their contributions to the partnership and who have no management rights, i.e., general partners are true partners and limited partners are mere passive investors.

As it relates to charging orders, the text of the Revised Uniform Limited Partnership Act is found at http://www.assetprotectionbook.com/ limited_partnerships_charging_orders.htm

• Limited Liability Companies

Synopsis: Discusses the basic elements and operations of limited liability companies.

Definition: Limited Liability Company (LLC) – A hybrid type of legal entity that combines certain traits of corporations with certain other traits of partnerships and other noncorporate legal entities. LLCs allow their owners (called members) to have the best of all worlds: pass-through tax treatment like a partnership, limited liability like a corporation, unheralded flexibility in ownership and management structure, and charging order protection.

Definition: Member-Managed LLC (MgrLLC) – An LLC that allows the members to have management rights, very similar in operation to a general partnership, but with some degree of limited liability for the members.

Definition: Manager-Managed LLC (MemLLC) – An LLC that provides for one or more designated managers to have management rights, and with the members having no management rights. With a Member Managed LLC, the members are in a role very similar to limited partners.

Definition: Single-Member LLC (SMLLC) – An LLC with but one member, who is typically also the manager, formed in a jurisdiction that allows a single member. Because they are relatively untested, the liability protections of SMLLCs are mostly theoretical, but should be similar to that of a sole-shareholder corporation.

As it relates to charging orders, the text of the Uniform Limited Liability Company Act is found at http://www.assetprotectionbook.com/ limited_partnerships_charging_orders.htm

• History of the LLC

Synopsis: Discussion of the history of the LLC in Europe and Latin America, the adoption by Wyoming of the first LLC statute, and the Check-the-Box Regulations.

Definition: Check-the-Box Regulations – Regulations promulgated by the Secretary of the Treasury in 1996 which allow an LLC simply to choose whether to be taxed as a partnership or a corporation.

• Tax Classification

Synopsis: Discussion of the tax treatment of LLCs as corporations, partnerships, or disregarded entities.

Definition: Disregarded Entity – An entity for which the tax consequences are attributed to its owner as if it did not exist. Note that this does not mean that the entity is “tax exempt”, which is a common and false claim made by tax scam artists.

• LLCs and Estate Planning

Synopsis: Discusses the uses of LLC for estate planning, and their similarities for federal gift and estate tax planning purposes to limited partnerships.

• Protecting S Corporation Shares

  Synopsis: Discusses the use of LLC to protect S corporation shares and assets in S corporations from creditors.